Brazil Challenges & Opportunities of an Emerging Country
November, 2011
Visagio 2
Brazil Country Profile
Political System: Democratic presidential republic
Population: 192M, world’s 5th (USA: 312M, world’s 3rd)
Political Capital: Brasília
Financial Capital: São Paulo
Cultural Capital: Rio de Janeiro
Area: 3.3M square miles (larger than contiguous USA)
Language: Portuguese
Religion: 75% roman catholic, world’s largest
Currency: Real (R$ or BRL)
Life Expectancy: 72.5 yrs (world’s 123rd, USA 78.3 yrs)
2010 GDP* (nominal): $ 2.090 trillion (7th)
2010 GDP* (nominal per capita): $10,800 (102nd)
Brazil is the largest economy in Latin America and the 7th in the world (nominal
GDP), being a continental country that is larger than the contiguous USA and the
world’s largest catholic population in the world
Source: http://www.economist.com/content/compare-cabana *https://www.cia.gov/library/publications/the-world-factbook/geos/br.html
Visagio 3
A Quick Snapshot: Bovespa (Stock Market)
The last 16 years were decisive for Brazil’s current position in world’s economy,
while the Brazilian stock market evolution shows a more mature reality for the
country
Brazil’s economy
has reached a
new level
Reaction to crisis
became faster
Elections has
lower impact on
economy
Brazil’s Bovespa Evolution*
How did Brazil
progress?
What are the future
challenges?
Source: *Citi Bank Investment Research !Latin America Equity Strategy: Brazil Fact Book” June, 2011
Visagio 4
Opportunities Challenges
Political
Stability
Commodities
Boom
Mature
Financial
System
Mature
National
Industry
Social Policy
Progress
External Trade
Diversification
Agenda
FUTURE
PAST
PRESENT
The current presentation will be divided in 5 main steps: past, current situation
main pillars, the present situation, the main challenges and opportunities for the
future and the short-term most probable scenario
1
2
3
4
5
Visagio 5
Opportunities Challenges
Political
Stability
Commodities
Boom
Mature
Financial
System
Mature
National
Industry
Social Policy
Progress
External Trade
Diversification
Agenda
FUTURE
PAST
PRESENT
The first step in the agenda will quickly focus on Brazil’s past for analysis
contextualization
1
2
3
4
5
Visagio 6
Past: History Timeline
Pedro Alvares Cabral
(1460-1526), Portuguese
explorer discovered Brazil
1500 1550 African slaves were shipped
to Brazil to work at sugar
plantations
1654 23 Jews left Recife and founded "New
Amsterdam" on Manhattan Island. The first
New York City synagogue was created in
lower Manhattan by the founders of the
first synagogue in the New World in
Recife.
Visagio 7
Past: History Timeline
1822 Brazil declared its
independence from Portugal
Slavery was abolished in Brazil
and 4 million slaves were freed
Brazilian monarchy was
overthrown and a republic was
established
1888 - 1889 1964 - 1985 A military dictatorship ruled
over Brazil
Visagio 8
Past: History Timeline
1994 Fernando Henrique Cardoso
elected president after helping
to bring inflation under control
Luiz Inacio Lula da Silva,
popularly known as Lula, wins
presidential elections
2002 2010 Dilma Rousseff, of President
Lula's Workers' Party, wins
second round run-off to
become Brazil's first female
president
Visagio 9
Opportunities Challenges
Political
Stability
Commodities
Boom
Mature
Financial
System
Mature
National
Industry
Social Policy
Progress
External Trade
Diversification
Agenda
FUTURE
PAST
PRESENT
The agenda’s second step focus on the 6 main pillars that support the latest Brazil
economy progress, leading to the present scenario
1
2
3
4
5
Visagio 10
Political Stability
The first important pillar that sustains the latest economic progress is concerned to
the political stability that the country has reached, presenting a mature democratic
presidential republic
After “re-democratization” (1989), population impeached 1 president, vice took over
2 presidents in 16 years (1994-2010)
2010 elections results would not jeopardize recent social/economic progresses
Current president, Dilma Rousseff, is the continuation of Lula administration (2002-2010)
Government has the majority in house of representatives
It is hard to change status quo for the worse but also for the
better: structural reforms are necessary!
Mature democracy demands negotiation and power balance for reforms
however…
Visagio 11
Commodities Boom: Dependency
Although Brazil continued diversification of external trade, the country still
depends a lot on Agricultural and Industrial Commodities as much as on Oil and Fuel
Source: *Bradesco “Brazil Macroeconomic Trend and Cycle” PDF file, March 2011
Visagio 12
Commodities Boom: High Prices
However, global commodity and energy prices have been rising during the last 10
years: current prices are reaching levels prior to 2008 crisis
Source: *Bradesco “Brazil Macroeconomic Trend and Cycle” PDF file, March 2011
Visagio 13
External Trade Diversification
Besides, the latest governments have focused on external market diversification in
order to lower dependency mainly on USA and Europe, focusing on emerging
markets and Africa
Brazilian External Trade Partners Diversification (2010)
Source: *Bradesco “Brazil Macroeconomic Trend and Cycle” PDF file, March 2011
Visagio 14
Mature Financial System
Brazil was awarded 1st place for its high
regulatory standards at the 2009 Financial
Stability Forum' in Basel that "helped it avoid
the worst of the global economic crisis"
At the close of first decade of the 2000s,
Brazil was one of only 4 countries in the
world with a wide spread on lending
We are used to dealing with challenging
environments at our institutions and our
regulations. Everything we have done since
the mid-1990s has tended to take a more
cautious approach.
Alexandre Tombini,
President of Central Bank
MV – 115.08 billion $
10th largest bank in the
world by market value
MV – 74.32billion $
Had acquired Brazilian
operations of J.P.
Morgan Fleming Asset
Management
and American Express
MV – 54.89 billion $
Largest Latin American
bank by assets
Controlled by the
government (major
instrument to reach
middle class)
The 3 Major Groups*
During the last 16 years, Brazil’s central bank gradually conquered political
independency, concentrating its decisions on technical parameters; Brazil’s banking
system is considered one of the most advanced in the world
Source: * http://www.forbes.com/lists/2008/18/biz_2000global08_The-Global-2000-Brazil_10Rank.html
Visagio 15
Mature Financial System
…which stimulates civil construction and creates new job offers for population
with different educational levels
Breakdown in Mortgage Loans in Total Stock of Credit of the Brazilian Financial System*
Government credit stimulation to
overcome economic crisis by internal
economy stimulation
State banks are the main inducers of credit expansion policy mainly to real state
sector…
Source: Citi Bank/ Bradesco “Citi´s 4th Annual Latam Financials Investor Field Trip”
Visagio 16
Mature National Industry
With the stable political situation, economy growth and government support, some
national champions are successfully entering international markets **
Largest company in Latin
America by market
capitalization and revenue
12th largest company in the
world in terms of capitalization
One of the world’s top 10
companies investing in research
and development
2nd largest mining company in
the world
World´s largest producer
of iron ore and pellets
Leader in long steel in the
Americas and a leading supplier
of special steel
Leader in mini-mill steel
production and steel recycling
in North America
World's 3rd-largest commercial
aircraft company
Largest global brewer with
nearly 25% global market share
Owner of Budweiser brand
Latin America's biggest power
utility company
10th largest in the world
4th largest clean energy
company in the world
World's 10th largest food
company
Miami/Orlando International
Airport
I-40 Interchange
Seven Oaks Dam
($ 23B)
($ 32B*)
($ 239B) ($ 86B)
($ 16B*)
($ 185B)
($ 18B)
($ 21B)
Source:*All values in parenthesis are market values, except for Odebrecht, BRF and JBS (2010 Revenue) ** http://www.forbes.com/lists/2008/18/biz_2000global08_The-Global-2000-Brazil_10Rank.html
World's largest company in the
beef sector
$ 225m acquisition of U.S.
firm Swift & Company in 2007
($ 34.9 B*)
Visagio 17
Mature National Industry
Brazil is the World's 2nd largest producer
of ethanol fuel
Brazil is the world's largest exporter
Together, Brazil and the United States lead the
industrial production of ethanol fuel,
accounting together for 87.8% of the world's
production in 2010*
In 2010 Brazil produced 26.2 billion liters (6.92
billion U.S. liquid gallons), representing 30.1%
of the world's total ethanol used as fuel*
Within this internalization process, the agricultural sector growth is highlighted by
sugarcane ethanol business expansion and high international competitiveness level
Source: *http://en.wikipedia.org/wiki/Ethanol_fuel_in_Brazil
Visagio 18
Mature National Industry
In 2003 Havaianas*
produced sophisticated
models with rubies for the Oscar
nominees. After American
celebrities were spotted by
paparazzi wearing Havaianas
flip-flops, it has definitely
earned the title of the Brazilian
most global fashion brand.
Stern was also the first to create
a worldwide warranty
certificate. One of his main
goals in life was achieved when
important international
gemological institutes revised
the old "semi-precious"
definition of colored stones and
began referring to them since as
"precious colored stones".**
The “Brazilian Fashion” Concept
Top earning model in
2010/2011, with an estimated
$45 million income, Gisele
Bündchen opened the
international market to Brazilian
models: Adriana Lima ($ 8M) and
Alessandra Ambrosio ($ 5M) are
also part of top 10 list: Brazil is
the best represented country.
Government programs and positive economic perspectives are encouraging Brazilian
companies to create and implement innovative ideas on international market,
specially exploring the “Brazilian Fashion” concept
Source: *www.havaianas.com **www.hstern.com
Visagio 19
Social Policy Progress
Short-term income transfer programs have positively impacted the economy by
creating a “middle-class country”; however, long-term educational programs are
still timid, what can represent a huge social expenditure debt in the future
Social Class Breakdown Changes from 2004 to 2010*
Around 33 million
people(around
17% of
population) left
low income class
and entered
middle class in 6
years, mainly
achieved through
income transfer
(short-term
effect)
Source: *Citi Bank/ Bradesco “Citi´s 4th Annual Latam Financials Investor Field Trip”
Visagio 20
Agenda
The 6 main progress pillars led the current country’s scenario, while 5 main
parameters are presented below before exploring the future challenges and
opportunities
GDP Growth
Country Rating Progress
Foreign Investments Raise
Formal Jobs Creation
Internal Market Maturity
OpportunitiesChallenges
Political
Stability
Commodities
Boom
Mature
Financial System
Mature
National Industry
Social Policy
Progress
External Trade
Diversification
FUTURE
PAST
PRESENT
1
2
3
4
5
Main Positive Impacts
Visagio 21
GDP Growth
Brazil seems to reach a more sustainable GDP growth with a positive tendency
estimation for the future, while scenario could be better if unlikely tax reforms
were approved
Oil shock,
high
external
debt,
country
default
“the lost decade”
economic
stabilization
economic return &
social progress
very
unlikely
Brazilian Historic Growth: 1960 – 2020 (expectation)*
Source: *Citi Bank/ Bradesco “Citi´s 4th Annual Latam Financials Investor Field Trip”
Visagio 22
Country Rating Progress
Brazil credit ratings are being raised recently by major credit rating agencies, such
as Standard & Poor's, Fitch and Moody's
2008 2011
Description Standard & Poor´s* Fitch** Moody´s***
Rating* BBB- BBB Baa2
Outlook* Positive Stable Positive
*For S&P, a bond is considered investment grade if its credit rating is BBB- or higher. Bonds rated BB+ and below are considered to be speculative grade, sometimes also referred to as "junk" bonds. **For Fitch, a bond is considered investment grade if its credit rating is BBB- or higher. Bonds rated BB+ and below are considered to be speculative grade, sometimes also referred to as "junk" bonds. ***For Moody's, a bond is considered investment grade if its credit rating is Baa3 or higher. Bonds rated Ba1 and below are considered to be speculative grade, sometimes also referred to as "junk" bonds.
BB+
BBB- BBB-
BBB
Fitch
S & P
<2008
Rating Tendency
Visagio 23
Foreign Investment Raise
Besides, foreign direct investment are reaching historical records every year: the
crisis year valley is comparable to the first economic growth cycle level in the 90’s
Foreign Direct Investment 1995 – 2011*
Cycle 1 Economic Stabilization
Cycle 2 Economic Return +
Social Progresses
Crisis valley
value reached
the same
level as
“Cycle 1” top
investments
Source: *Bradesco “Brazil Macroeconomic Trend and Cycle” PDF file, March 2011
Visagio 24
Formal Jobs Creation
Brazilian workforce is tending to have more formal jobs, even though legislation is
old and extremely inefficient: 30% of current formal jobs were created between
2004 and 2009
Change in the Percentage of Formal Jobs in Brazilian Workforce
(2004 – 2009)*
Around 30% of
current
formal jobs in
Brazil were
created
during the
period: 13
million jobs
Source: *Bradesco “Brazil Macroeconomic Trend and Cycle” PDF file, March 2011
Visagio 25
Internal Market Maturity
Internal market growth and maturity are presented in chart below, where it show
low 2008 crisis impact on household consumption, what was Brazil’s main solution
for the difficult moment
Evolution of Household Consumption & Gross Formation of Fixed Capital*
Companies’ perspectives went down
during 2008 crisis, but rapidly ramped-
up the following semesters
Household Consumption and export
level (10% of GDP) lowered 2008 crisis
impact to Brazilian economy and will
probably do the same in 2011
Income distribution is one of the key
drivers of Brazilian growth in recent
years
Household Consumption is about 60%
of GDP, which indicates its domestic
market-oriented economy, in contrast
with other emerging economies
Source: *Citi Bank/ Bradesco “Citi´s 4th Annual Latam Financials Investor Field Trip”
Visagio 26
Agenda
However, important challenges will limit country’s future development and growth,
being the 6 most important described below and detailed on following slides
Unbalanced Government Fiscal Policy
High Social Security Expenditures
High Interest Rates
Poor Logistics Infrastructure
Poor Education
Unpopular Reforms Need
Corruption
Main Present/Future Challenges
OpportunitiesChallenges
Political
Stability
Commodities
Boom
Mature
Financial System
Mature
National Industry
Social Policy
Progress
External Trade
Diversification
FUTURE
PAST
PRESENT
1
2
3
4
5
Visagio 27
Government Fiscal Policy
Brazil Inflation Rate**
Annual Change on Consumer Price Index
Federal Government Expenditures to GDP 1997 – 2010*
…making it difficult to control
the inflation
Government is spending too much, especially Lula in his later years…
Source: *Bradesco “Brazil Macroeconomic Trend and Cycle” PDF file, March 2011 **http://www.tradingeconomics.com/brazil/inflation-cpi
Visagio 28
Social Security Expenditures
Demographic Growth 1981-2030*
0,0
0,5
1,0
1,5
2,0
2,5
3,0
2005 2006 2007 2008 2009 2010*
Income Transfer Program Expenses vs. GDP Evolution(Baseline 2004 = 1,00)
Income Transfer Program Expenses GDP
Population will start decreasing in 2040
Is Brazil ready to pay this bill?
The government high expenditure is also due to social programs expansion and older
population demanding larger benefits volumes that overcome GDP growth pace
Source: *Citi Bank/ Bradesco “Citi´s 4th Annual Latam Financials Investor Field Trip”
Visagio 29
Interest Rates
BRIC
Brazil: 5%
China: 2%
Russia: -0.15%
India: -3.4%
OTHERS
Euro zone: -1.5 %
USA and UK: -2 %
Australia: 2.5 %
Brazil has the highest real interest rates in the world, by a very fat margin
The interest rates is the main mechanism used by Brazil Central
Bank to fight against inflation rise due to the economy growth and
government expenditures: government is not doing its homework
Source: Bradesco “Brazil Macroeconomic Trend and Cycle” PDF file, March 2011
Visagio 30
Exchange Rate
Exchange rate are decreasing mainly due to commodities price rise and record
foreign direct investments, creating a more challenging scenario for exporters
R$/US$ Exchange Rate 2003-2011*
However, 2011
crisis will make
companies focus
on domestic
markets, since
developed
economies are
buying less
R$/US$ exchange
rate drop affects
Brazil’s
exportations
negatively.
Source: *Bradesco “Brazil Macroeconomic Trend and Cycle” PDF file, March 2011
Visagio 31
Infrastructure
The World Bank and sector specialists believe Brazil needs to invest closer to 5% of
GDP in infrastructure: this is more than 2x what the BNDES is currently projecting for
2010-2013
Brazil Russia India China Roads 105 125 90 53 Ports 123 93 83 67
Air 93 104 71 79 Rail 87 31 23 27
Worst
2nd Worst
Best
BRIC Infrastructure Quality World Ranking*
Brazil and Russia disputes the last position of infrastructure quality between the
BRIC countries, what means a great challenge and also invest opportunity for the
country
Source: *Citi Bank “Corporate Securities Strategy: Brazilian Infrastructure” , September 2010
Visagio 32
Education
Country School Life
Expectancy (in Years) World
Ranking New Zealand 20,3 1
USA 16,0 22 Russia 14,1 56 Brazil 14,0 58 China 11,6 123 India 10,3 150
http://unstats.un.org/unsd/demographic/products/socind/education.htm
Cities CEOs Yearly Earnings São Paulo US$ 620 mil New York US$ 574 mil London US$ 550 mil
Singapore US$ 368 mil Hong Kong US$ 242 mil
http://www.exame.com
The biggest challenge to education progress in Brazil is to overcome political
governance that shares responsibility between cities, states and country levels,
besides a long term strategic plan.
Low education levels and economic growth leads to salaries inflation
Although recent progress is clear, Brazil still has a long way to reach education
excellence, what brings workforce deficit for technical and high education services,
leading to high salaries to few and inflation
Visagio 33
Reforms
World Bank: Brazilian companies spend the most time to calculate and pay its taxes
to the government in the world!
IPI
COFINS
PIS
CIDE
ICMS
ISS
IRPJ
CSLL
8 taxes over goods, services and profit
Transform 8 taxes in one
whole taxation logic
Tax Reform
Tax reform would lead to at least a 0.5% increase in GDP for at least 20 years!
At last, important reforms, such as the tax reform, are on hold due to political
impasse between governmental levels: agreement could lead to at least a 0.5% GDP
increase for the next 20 years
Visagio 34
Corruption
Red Zone
Brazil achieved a higher position in 2010, though it gained the
same points as in 2009
In 2010 Brazil occupied the 69th position* within 178 listed countries in Public
Sector Corruption Ranking prepared by ONG International Transparency
Source: *http://www.band.com.br/noticias/brasil/noticia/?id=100000361377
• Argentina
• Ecuador
• Venezuela
• Brazil
• Italy
• Mexico
• India
• Denmark (9,3 points)
•New Zealand (9,3 points)
• Singapore (9,3 points)
• Canada (8,9 points)
Yellow Zone Green Zone
2010 3.7 points
The same position as
Cuba, Romania,
Montenegro
2009 3.7 points
75th position within 180
countries
0 10
Visagio 35
Agenda
Following the main challenges presented, another group of main future
opportunities are presented
World Cup 2014
Olympic Games 2016
Pre-Salt Oil & Gas
Ethanol
Real Estate
Water Resource & Arable Land
Main Present/Future Opportunities
OpportunitiesChallenges
Political
Stability
Commodities
Boom
Mature
Financial System
Mature
National Industry
Social Policy
Progress
External Trade
Diversification
FUTURE
PAST
PRESENT
1
2
3
4
5
Visagio 36
2014 Soccer World Cup and 2016 Summer Olympic Games
Citigroup estimates that the 2014 World Cup
could generate direct infrastructure
investments in Brazil of 0.5% to 1% of GDP,
with a total of approximately R$16 billion
(approximately US $9 billion).
Infrastructure Investments:
0.5%-1.0% GDP
The 2010 World Cup likely had a total impact
on South Africa’s GDP of 1.25% to 1.5% of GDP
for an economy 1/5 the size of Brazil’s.
Citigroup believes that 1.5% of GDP is a
reasonable higher end estimate for Brazil.
50%: Stadiums & hotels construction/renovation, plus…
Urban Reconstruction
Public Safety
Highway
Airports
IT & Others
Impact: 1.5%-2.0% GDP
Direct infrastructure investments, plus…
Media
Visitors
Operations-Related Spending
Other Indirect Impacts
Brazil will hold the two main sports events in the world: 2014 Soccer World Cup and
2016 Summer Olympic Games in Rio de Janeiro; Soccer World Cup alone should
stimulate a 1.0% GDP investment and a 2.0% GDP return.
Source: Citi Bank “Corporate Securities Strategy: Brazilian Infrastructure” , September 2010
Visagio 37
Pre-Salt Oil & Gas
Besides, Brazil started exploring oil in deep waters, called the Pre-Salt, what will
make Brazil the 7th largest producer in the world
Source: Citigroup Global Markets – Brazil’s Oil and Gas Industry Outlook, May 2011
New Oil Finds and the Pre-Salt
Visagio 38
Ethanol
Sources: BP Energy Outlook, Ethanol Summit: José Goldemberg Lecture
Liquid fuel demand growth will be met by
supply growth from OPEC and Biofuels Potential demand resulting from
present mandates up to 2020/22
210 billion liters
70 billion liters
Current ethanol global supply
140BL/Y
Potential
Repressed
Demand
USA and Brazil are the biggest producers and exporters of Ethanol
(corn and sugarcane), considered the current best biofuel alternative
Still considering energy opportunities, Brazil and USA share an specific one
concerning the ethanol potential market, that is still limited by countries’ mandates
Visagio 39
Real Estate Sector
4,3%
24,3%
28,3%
37,0%
Brazilian Market (*) English Market Eropean Market American Market
Real Estate Credit vs. Total Credit
SM = Minimum Wage
90% of real estate deficit is
concentrated in lower income
social group
Real Estate Deficit per Social Group
Total deficit: 7.2M houses
Compared to other economies,
real estate credit still presents
large growth potential
A special focus is necessary for the Brazilian real estate sector, which credit is still
very timid considering the huge total deficit of 7.2 million houses
Visagio 40
Real Estate Sector
Real estate credit is
expected to reach
11% of GDP
participation in
2014.
3.547 3.927 4.293 4.675 5.076
5,14,5 4,5 4,5
5,7
7,9
11,1
7,5
2,9
4,1
0
2.000
4.000
6.000
8.000
10.000
12.000
2010 Proj. 2011 Proj. 2012 Proj. 2013 Proj. 2014 Proj.
-1,0
1,0
3,0
5,0
7,0
9,0
11,0
PIB Crescimento Real PIB Crédito Imobiliário / PIB
Real Estate Credit GDP
Participation Growth
Government programs are stimulating real estate credit as an economic growth
mechanism, which should reach 11.1% of GDP in 2014 even with the lower GDP
growth expected for the period
Visagio 41
Renewable Water Resource and Arable Land
At last, Brazil is considered by specialists as the world’s land and water banks, what
are considered to be the most strategic resources in the future to attend global
consumption and urbanization growth
Source: www.agorafinancial.com, FAO
http://www.toradv.com.br/en/News%20&%20Events/001%20-%20The%20Miracle%20of%20Cerrado.htm
The World’s Largest Renewable Water Resource
Brazil represents 15% of total proven
renewable water resource, while USA
(2nd) represents 8%
Arable Land Availability
Brazil has as much spare farmland
(over 400 ha) as the next two
countries together: Russia and USA
0
50
100
150
200
250
300
350
400
450
500
In Use Potential
Visagio 42
Amazon Rainforest Issue
Brazil is often accused of levelling the Amazon rainforest to create its farms, but
hardly any of this new land lies in Amazon, most is cerrado**
Source: **http://www.toradv.com.br/en/News%20&%20Events/001%20-%20The%20Miracle%20of%20Cerrado.htm
* million hectares
Total
Area*
Native
Vegetation*
Arable
Land* Other
851 498 338 15
100% 58% 40% 2%
Available 30%
Pasture
Sugar Cane Agriculture
Visagio 43
Opportunities Challenges
Political
Stability
Commodities
Boom
Mature
Financial
System
Mature
National
Industry
Social Policy
Progress
External Trade
Diversification
Agenda
FUTURE
PAST
PRESENT
In order to wrap-up the present document, a last statement is presented concerning
the most probable short-term scenario expected by the market
1
2
3
4
5
Visagio 44
5 Fives Cycles for 5 Years
GDP
Inflation
Real Interests Rate
Unemployment
Current Account - GDP
Five 5%
Cycle
… for 5 Years
Market specialists expect a five 5% cycle for the next 5 years in Brazil, while 2011
has been a hard year for the country due to high government expenditure by the
last year of Lula’s government and global 2011 recession
5.8% - 6.5%
3.3%
5.2% - 6.0%
2.0%
7.0%
* All data collected from Brazil Central Bank 2011 Forecasts
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